Modern Water Demands Require Smart Rate Setting

Water utilities today face enormous demands. As Americans, we consume more water than any other nation in the world while paying much less than most other developed countries. Standards for water quality continue to rise, but users’ rates historically have not, leaving the cost to utilities themselves or local governments. Water is undoubtedly our most essential utility, and if service providers hope to continue offering this indispensable resource abundantly, the price users pay for it will need to begin reflecting its actual value.

New challenges call for modern approaches

Business Insider recently published an article entitled America’s Got a Water Problem, by water expert Cynthia Barnett, noting that municipalities and utilities across the country can anticipate $1 trillion in repair costs for water related infrastructure costs over the next 25 years. “In recent years, municipalities have begun raising rates to play catch-up. Since 2007, city water prices have risen at rates faster than the overall cost of living,” Barnett writes, “Even so…it is not enough.”

Extensive droughts in the western U.S. last year threw into sharp relief the water scarcity afflicting much of the nation, while cities like Des Moines, Iowa and Toledo, Ohio have brought poor water quality to the surface of the national dialogue. Decades ago, billions of dollars were distributed by the federal government for water plant and pipe upgrades to prevent water quality and distribution issues just like the ones many parts of the country experienced last year. However, funding for water infrastructure from the EPA and other federal agencies has been gradually declining. The decrease in funding has unfortunately coincided with a rise in requirements for contaminant removal from drinking water and with new challenges brought on by extreme weather.

Rates can encourage conservation

Traditionally, the rising costs of providing abundant drinkable water—even if that water is headed for toilets or other sources not meant for drinking—haven’t been passed onto ratepayers. This can then be tricky for elected officials or water utilities when deciding to raise water rates; customers understandably balk at sudden changes in prices, particularly on a commodity for which we’ve grown accustomed to paying relatively little. For water utilities, the current environment requires a balance be struck between the actual price of water service and the rates charged to consumers. Many customers simply can’t afford to have water rates skyrocket, and after all, access to water is a necessity. But new obstacles require new tactics for overcoming them. Luckily, many of the solutions that show potential fall to the consumer. Communities where residents use less water save money long-term as they slow down the wear-and-tear on infrastructure and can avoid the costs of finding new water sources. The technology for water conservation is there—activities from crop irrigation to showering have been made much more efficient than they used to be—so the goal now is to incentivize users to conserve.

One way for utilities to do this is to operate under a user fee funding system and build a tiered price structure into their rate setting strategy. With a tiered price structure, those that use more water pay more, making the system more equitable and encouraging individuals to use less. Increasing rates to a level more reflective of the actual price of water in combination with a tiered system may also motivate consumers to adopt more efficient habits, but as with any rate increase, new costs must be manageable and justifiable to users in order to avoid losing ratepayers’ trust.

Water utilities have a large task at hand in continuing to provide Americans with a high standard of water service. There are still funding opportunities available such as EPA grants and State Revolving Funds, along with investment prospects from the private sector in the form of Green Bonds. However, the responsibility for paying for infrastructure improvement and maintenance shouldn’t fall to utilities or municipalities alone. For a sustainable national water system, user rates will eventually need to be indicative of just how valuable this resource is.